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What the landmark Supreme Court judgment on coal allocations means for solar and for doing business in India

On August 25th, India’s supreme court judged all coal block allocations to private parties after 14th July 1993 to be illegal due to “arbitrariness and legal flaws” (see ruling here). While it is not clear what will follow next – i.e. how these transaction will be either untangled or made legal in some manner, the ruling itself gives a rare insight into the Indian coal and power industry. It will have an impact on the investment climate and it will be very beneficial for solar (and other renewables).

The ruling creates more uncertainty in the coal industry in India, further diminishing its ability to deliver power to India in time

The coal setback further highlights the central role solar can play in India’s future energy supply

India’s liberalization was only half way: from a state-run economy to one run by a group of insiders. It needs to now broaden and embrace competition and entrepreneurship to flourish

The Supreme Court judgment is instructive in at least two ways: it shows the flaws in the coal industry in India as well as some larger flaws in India’s business environment. The Supreme Court, in essence, noted that India gave preferential access to a public resource (coal) to a group of private companies. This benefitted a few players while India as a whole lost out. Think of this in the context of earlier allegations and scams around coal allocations, coal mining and coal transportation and the consistent under-delivery of coal fired power plants.

The allocation process of private coal blocks was highly unprofessional. There was no verification of an applicant’s experience in the end-use project for which the coal allocation was sought, there were no advertisements of the allocation opportunity and thus no competition, and coal blocks allocated exceeded the requirements of the companies. The judgment said: “The rules of the game were changed to adjust… applicants.”

This is bad news for India, whose growth and development is hampered by a shortage of energy and by crony capitalism. A large portion of the economic growth experienced by the country since the early 1990’s was driven by the preferential access to and exploitation of public, national resources such as land and raw materials (and I would add pollution, waste, water and air quality to that) by a number of industrial companies. Value creation and innovation played a much smaller role. India’s IT and outsourcing miracle is an exception, not the rule.

The liberalization of the Indian economy was only half done: large companies with access to political decision-making were able to grow revenues and profits, while smaller companies and entrepreneurs were left to languish. Money was made in real estate or coal, not in manufacturing or services. And money was made by large Indian companies, rather than by small or medium sized companies or professional investors. India now needs a second liberalization to become a real market place for entrepreneurs, for small and medium sized businesses and for professional Indian and international investors. A key requirement for this to happen is to reduce bureaucracy and increase transparency to allow for more competition. The Supreme Court ruling is a step in the right direction. The new government with its “make in India” mantra can use the momentum to effect this change.

For the Indian solar market, the ruling is good news. The more uncertainties and difficulties there are in the coal sector, the more the government, investors and consumers will look at alternatives. Solar is perhaps the most attractive alternative because it has the theoretical potential to supply India with the power it needs in the next decades. The ruling might, in the short term, have a negative impact on overall investment sentiment in India by increasing perceived risks especially of government contracts. In the longer term, however, it will hopefully contribute to a more competitive, investor- and entrepreneur-friendly energy market. Solar as a technology is much better suited to this than coal: The solar resource is unlimited, project complexity is far lower and project sizes can start from very small, making it inherently democratic and in the context of the current energy industry – revolutionary.

1 comment

The judgement of the Honorable Supreme court has clearly exposed the flaws in the coal industry. The allocation of the coal blocks was unscientific and there were certain vested interests which made the allocation a complete mess. This decision of the apex court has made the investors turn their eyes on solar energy – which is touted as the best alternative to coal.